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2 States breach 3% fiscal deficit target

2 States breach 3% fiscal deficit target

RBI can only advise states, but can do nothing to stop them from breaching the fiscal deficit target as it does not have a constitutional backing in this regard. This was stated by RBI officials in a teleconference post the monetary policy review.

The RBI has cautioned seven states against breaching the 3% fiscal deficit target but two states have already breached the requisite threshold.

Why do state governments breach fiscal targets:

State governments face severe constraints on the financial front as the non- debt creating receipts are found to be insufficient for meeting the developmental obligations of the state

This leads to a situation where states resort to market borrowings to meet their developmental expenditure

Such borrowings if unchecked may result in accumulation of debt liabilities and pose a major challenge to macroeconomic stability

Existing provisions:

But states can breach the threshold after taking permission from the Centre in this regard

Expenditure made under UDAY scheme can be exempted from fiscal deficit target by states

Farm loan waivers and its impact on fiscal deficit:

Implementation of farm loan waivers by some states have compounded the issue

Breach of fiscal deficit threshold can cause inflationary spillovers

NK Singh panel submits its report on FRBM act:

The creation of a panel to review the FRBM act was announced in the budget 2016-17

The panel has recommended a fiscal deficit target of 2.5% of the GDP

Enacting a new act after repealing the existing FRBM act and creating a fiscal council

A debt to GDP ratio of 60% for the central government and 20% for the state government

A deviation in fiscal deficit of not more than 0.5% will be allowed in case of specific circumstances which includes war, calamities of national proportion, collapse of agricultural activity, far-reaching structural reforms, and sharp decline in real output growth

CS Exams

Student Speak

The mains test series at Chanakya ias academy was very helpful during my mains preparation. The quality of questions and the evaluation done by the teachers is at our with the standards of civil services. The model answers also provide a detailed picture of the important topics for mains examination.